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Mortgage Center

Renting vs. buying a home

Being able to buy a home is a great investment for the future. But that doesn't mean that home ownership is the best option for everyone. Many factors must be considered before buying a house in addition to having the proper funding. Whether you're not certain about your job security or your job relocates you every few years - many situations must be considered before deciding to rent or buy a home.

There are certainly situations where buying a home is NOT the prudent thing to do. If the market is high, and you feel that homes are overpriced, that’s a good reason. If you simply don’t have the funds to make a down payment, and/or the monthly payment would be more than you are comfortable with, then stay in your rental. Nothing wrong with that, but there is something very wrong with putting yourself into a position where you can’t pay your bills.

Other reasons not to buy include not being sure where the relationship with your significant other is headed, a job that might prompt a relocation, and a possible change in lifestyle coming up in the near future. For example, if your company was just sold and you may be out of a job soon, this is certainly not the time to buy a home. Aside from the ‘real’ reasons, there could be emotional reasons not to buy a home. If you feel there may be something holding you back and you really do want to buy (and you can), try to work out the obstacles. However, if you truly do not want to buy a home and/or you can’t, make peace with that decision and move on. People live very happily in rentals, and while it usually makes sense to buy a home, that doesn’t apply to every person and situation.

Preparing to buy your first home

Buying a home can be a scary process for the first-time home buyer. Between trying to find the perfect house in a good location, to the finding a mortgage that fits your needs and budget. There are many unknowns and unrealistic expectations that a buyer will form before they purchase their home. Overcoming these challenges means understanding a few basic notions before you prepare to buy your first home.

A decade ago, economic experts were regretting the arrival of a “boomerang generation.” Young people had left for college with bright eyes and exciting dreams of rewarding and fulfilling careers. Then, in 2000, the economy collapsed. These ambitious, well-educated folk found themselves with tons of debt and little opportunity. Many of them swallowed their pride and moved back home with Mom and Dad.

This situation wasn’t great for anyone. Mom and Dad had to put retirement plans on hold. Gen Y members had to postpone their professional and social development to take internships and part-time jobs. It’s also hard to feel fully “grown up” when still living at home with mom and dad.

The economy improved, and members of this generation used hard work and education to put themselves in a position to consider buying houses. Seventy percent of Gen Y, according to a Better Homes and Gardens survey, now find themselves ready to strike out on their own again.

Buying a home can be an intimidating task, though. The challenges of being a first-time home owner can be scary, particularly for people who are moving away from home. Let’s take a look at a few guidelines to help take some of the stress out of the decision.

The house you buy may not be forever

Because of the reliability of real estate being an investment, many first-time home buyers tend to want to get the biggest house they can. They may be trying to start families or getting more space for their existing family to grow. Whatever the motivation, buying a house is one of the few times when people try to plan their lives 30 or more years down the road.

That’s a really big gamble. Any number of unanticipated changes might happen in 30 years: Your job or your partner’s job may force you to move, your parents may have medical problems that need greater care, or you may decide to change careers or start your own business. This unavoidable uncertainty means it’s not in your best interest to plan for a future that’s so far away.

Look for a house that suits your immediate needs and understand that every place is adaptable to a degree. A den or an office can become a nursery, a shed can become a workshop, and a basement storage area can become another bedroom. Don’t feel like you need to plan your whole life out just because your buying a home. Make some reasonable, educated guesses about what your life will be like for the next 10 years or so, and buy the house you need for that time frame.

Don’t become ‘house poor’

Many first-time home buyers also fall in to the trap of figuring out the most that they could afford to spend on a new home, then spending exactly that amount. The reasoning behind this decision is simple: money spent to repay a mortgage isn’t really “spent.” Homes can be refinanced or remortgaged if money gets tight, or repaid when the house is sold. That may seem reasonable, but only to a point. People who end up spending most of their monthly income on a house payment leave little for other debt repayment, retirement savings, or building an emergency fund. They find themselves unprepared for an unexpected medical bill or car repair. They also find it difficult to take vacations or make home improvements. That’s an unpleasant position to be in.

Avoid this trap with a little financial consultation. Understand that your upper limit for housing expenses should only be a worst-case scenario. Buy the house you need, not the most expensive house you can afford. You’ll be happier in your home and in your budget.

Understand the process

There are a lot of factors that go into attaining a mortgage. First, you and the seller have to agree on a final price, which includes the money you pay for the house and a host of fees, like the inspection, appraisal, and title transfer. The realtor in charge of selling the home can walk you and the seller through the process.

Next, you’ll need to arrange financing. You’ll want to shop around for the best prices, but new regulations can make that costly and time-consuming. Each financier has to appraise the value of the home, and then compare their estimate to the price you agreed on with the seller. The greater the difference between these two values, the more expensive your home loan will be, but that’s not the only factor. The financing institution also has to check your credit, verify your income and assets, and confirm your employment to follow new regulations passed after the last financial disaster that was largely powered by bad mortgages.

These regulations can make it more difficult just to get the home loan, much less one at a good rate. This is particularly true if your employment history is short or if you’re just getting started with a new business.

You can help this process by buying a house you can afford, building your credit score by reducing the amount of credit you’re using, staying with the same employer and saving for a significant down payment. You should aim to have at least 20% of the total amount of the sale for a down payment, as this is the threshold to avoid having to pay for private mortgage insurance (PMI). A larger down payment also reduces the risk of the loan to the lender and can help get you a less expensive mortgage. This, in turn, makes for a less expensive housing payment. You can also ask for help from mom and dad; a cosigner on a mortgage may improve your credit score and lower your interest rates.

Don’t feel alone

A lot of big national lending institutions advertise attractive mortgage specials on billboards, TV, and the radio. The rates may seem reasonable and even tempting. In reality, though, those rates go only to a small percentage of borrowers – borrowers who have incomparable credit, significant income, and a substantial net worth. As a first-time home-buyer, you probably will not qualify for the rates those large, faceless corporate lenders are using as bait to pique your curiosity.

Given the difficulty of shopping around, make your first stop the institution that has the best chance of giving you the best rates from the start. AAFCU is here to help your community, and that includes helping new home-buyers secure loans for the first time. You’re making the right decision by looking for a home during a buyer’s market. Make another smart call by speaking to a credit union representative about mortgage rates. When you’re ready to get out of the basement, your first stop should be AAFCU.

Knowing the new mortgage rules

Whether you're preparing to buy your first home or looking to refinance your current mortgage, it's important to know and understand the new mortgage rules that affect the loan process. These rules were designed to prevent future housing bubbles and help find the perfect home loan for you.

You may have heard that the Consumer Financial Protection Bureau (CFPB) issued new mortgage rules. While it now may be more difficult to secure a home loan, these rules are truly aimed at protecting you, the consumer. The rules are designed to prevent future housing bubbles in the wake of the Great Recession, thereby strengthening the country’s economy—and your bottom line.

If you’re in the market for a home, or want to refinance your current mortgage, you will want to educate yourself on the impact that these new rules will have on you as you work through the loan process. Here are some of the most important take-a ways.

Debt-to-income ratio. One of the biggest changes to mortgage loans is that lenders must prove the consumers’ ability to repay the loan within a reasonable loan period. Lenders will look at your debt-to-income ratio, or how much you owe (including student loans, credit card payments, living expenses, etc.) compared to your monthly income. Generally, this ratio needs to be below 43 percent. To calculate this, total up all your monthly payment commitments and divide that by your gross (before tax) monthly income.

Maximum loan terms. Historically, loan terms have typically been 15 or 30 years, but some mortgage brokers offered loans beyond 30 years. New rules state that 30 years is the maximum. This doesn’t impact many consumers, but it does protect them from the additional interest accrual for loans that would be amortized over an additional 10 years or so.

Life of loan picture. In the past, lenders have qualified borrowers on “teaser rates,” or rates with special terms that expired after only a few months or years. Once the special terms expired, borrowers often struggled to make payments on the new, usually higher, interest rates or baseline payments. This is because the borrower’s debt-to-income ratio has increased with that the teaser being gone. The CFPB’s new rules require mortgage approval over the life of the loan—after the teaser rates expire.

More detailed history. No-doc and low-doc loans are a thing of the past, with lenders now required to document and verify applicants’ income, assets, credit history, and debts. While this means more paperwork and a longer process for consumers, you will get a much clearer picture of what you can afford and how your new mortgage payment will impact your bottom line.

No broker incentives. Part of what created the housing bubble and subsequent burst was the practice of mortgage brokers pushing through loans for consumers who really could not afford them—all to earn financial incentives for themselves. These “steering” practices are no longer allowed. Brokers are all tied to the same rules, thus protecting consumers from questionable tactics to get their loan approved.

Upfront fees. All mortgage applications come with fees—title insurance, origination fees, underwriting, processing, etc. CFPB’s new rules limit these fees to no more than 3 percent of the mortgage balance, which now makes those upfront fees more reasonable and predictable.

No more interest-only. Interest-only loans are considered a risky loan feature, causing the principle balance to continually increase even though the loan holder makes regular monthly payments. New rules prohibit these types of loans, as well as other risky practices, for qualified mortgages.

While these new rules may be difficult to understand and sift through, the loan officers at AAFCU are talented and knowledgeable, and will work with you to identify your debt-to-income ratio and find the perfect home loan for you. As always, we welcome your questions and have always provided our members with responsible, affordable home loan options.

Protecting your home from mortgage scams

Mortgage scams come in all shapes and sizes. As scam artists become more deceitful with their attempts to steal from you, you must stay informed on common scams and how to overcome them in order to protect yourself and you home. Scammers don't care if you're buying your first house or if you are being faced with foreclosure - they will do anything to try to steal your money, personal information, and even your home. Be aware of common scam tactics so that you can defend yourself against scams and don't become a victim.

The phrase “home security” is pretty widely used and has a variety of contexts. It can mean locking doors and windows when leaving the house, setting up an alarm system, participating in a neighborhood watch, or setting up automatic lights for vacations. These are all steps homeowners take to keep the contents of their homes safe.

When it comes to the home itself, though, people can be a lot less particular. While homeowner’s insurance can protect against natural disasters, there’s a new threat to the cornerstone of the American dream. Scam artists are targeting desperate homeowners, trying to steal their money, personal information or even the home.

These scams come in a variety of shapes and sizes, and each one needs a detailed response. Before you do anything with your mortgage, check to make sure your “once-in-a-lifetime” offer isn’t on this list.

1. Up-front cost refinance

The scam: You get a phone call or a letter from someone who wants to refinance your mortgage. The rates they’re offering are ridiculously low. They can cut your monthly payment by hundreds of dollars or help you pay off your mortgage in record time. All you have to do is pay a small percentage of those savings up front.

Of course, the company offering the mortgage is fake. You might get bills from them for the new amount, but paying them won’t affect your mortgage. Meanwhile, the institution that does hold your mortgage still expects you to make your regular payments.

How to beat it: It’s illegal to charge up-front fees for mortgage refinancing. Some institutions may try to waffle around this by calling them “document processing” fees or using some other jargon. Whatever they call it, it’s against the law and is a sure sign this “lender” is really just looking for a quick payday while not delivering anything in return.

Also remember that, while rates can fluctuate over time and from institution to institution, the variation is limited. If someone is offering a rate that is several percent lower than anyone else in town, be highly skeptical. Check with your Better Business Bureau to see if the company exists and/or if complaints have been filed against it.

2. Hope foreclosure relief

The scam: This savage scam targets homeowners who are facing foreclosure. Whether because of job loss, medical expenses, or other hardships, foreclosures affect 100,000 households each month. People in desperate situations try anything they can to dig themselves out. That’s when they get a phone call from someone representing Hope Services who can connect them with government assistance to stop their foreclosure. All they have to do is make three “trial payments” into a mortgage escrow account.

Hope Services collects the money and encourages borrowers to stop paying their mortgage. They’ll actively encourage homeowners not to talk to lenders or lawyers. They’ll take care of everything. As it turns out, Hope Services provides neither hope nor services. Homeowners are stuck facing foreclosure hearings without any assistance whatsoever.

How to beat it: Anyone who tells you not to get a lawyer or talk to a lender does not have your best interests at heart. If you miss several mortgage payments due to qualifying life circumstances, call your lender. Most institutions would always rather you pay something and keep you in your home than have to go through the process of foreclosure. Keeping lines of communication open is critical to getting back on the right track.

Also, watch out for high-pressure sales tactics. Anyone who wants you to make a mortgage decision on the spot is trying to deceive you. Mortgages are long-term arrangements and they should be considered carefully. A “money-back guarantee” is also a big red flag. Getting your money back will do you little good if you lose your house in the process.

3. The fine print deed sign

The scam: Scammers use a variety of up-front pitches. Some might offer to lower your rates or lower your mortgage payments. Others might try to rescue you from foreclosure. Still others might offer a home equity line of credit with alarmingly good terms. They may also offer to take over the deed to your house and then use their high credit rating to secure a lower rate, while allowing you to remain in the home as a renter. Whatever the pitch, there are a ton of forms to sign. All of them are written in unreadable jargon.

Somewhere amongst these forms, perhaps buried in the back, is a form signing the deed for your house over to the scammer. Once they have the deed, they can rent the home to someone else or sell it outright while forcing you to vacate. Worst of all, you’re still on the hook for the balance of the mortgage, since the loan is tied to you and not to the home.

How to beat it: Examine every document you sign relating to your mortgage or home. Have someone with experience in these matters look over documents if you’re not confident in your ability to detect these scams. Spending 20 minutes with a real estate lawyer is expensive, but not as expensive as losing your home.

There is never a legitimate reason to sign the deed of your house over to someone else unless you’re selling the house. While rent-to-buy schemes aren’t illegal, they very seldom end well for the renter. It won’t even get you out of legal or financial trouble.

Also, be wary of anyone who claims to guarantee a termination of foreclosure. No one can make such a guarantee, and legitimate businesses would lose everything in lawsuits. The same is true with money-back promises. That’s good protection when buying a blender. It’s not something anyone can promise for your house.

Home improvement projects with long-term return

Renovations not only improve the functionality and the aesthetics of your home, but they can also increase the value of your house - some improvements even providing close to 100% return on investment (ROI). These projects don't pay for themselves immediately and can takes years to recoup their costs; however, the improvements they can make to home value and quality of life will make the well worth the wait.

When you’re making improvements to your home, you’re not just making your life better in the short term. You’re also making an investment in your future. Ideally, the increase in the value of your home will exceed the cost of the improvement.

However, it seldom works out like that. The most efficient home improvements don’t pay for themselves immediately. The first item on this list has a Return on Investment (ROI) of 98%. That means you get back 98% of the money you put into it. To look at it another way, you lose 2% of your initial investment.

It takes years for the appreciation in your home to recoup the expense of an improvement. If you’re looking for an investment, putting your money in a share certificate or other long-term investment option will net you more. When you’re making home improvements, though, you’re looking for ways to improve your quality of life while being as thrifty as possible.

Calculating ROI can be difficult because the data is based on national averages. For instance, in drought-afflicted parts of the country, water-efficient fixtures, rainwater collection facilities and low-water landscaping will pay long-term dividends. In places with lots of solar exposure and high utility costs, solar panels will make your home more cost-efficient and attractive to buyers. No one will pay more for a well air-conditioned house in Alaska! Keeping that in mind, finding out what works for your market therefore depends a lot on trends and local conditions.

There is some good news if you’re looking for more universal approaches for getting the best increase in value for your home improvement dollar. There are a few simple rules to follow. Seek relatively low-cost improvements that require little to no maintenance. They should immediately distinguish your house from similar homes and, ideally, they also improve the energy efficiency of your home.

Here are four home remodel projects that can improve the resale value of your home. They’re excellent uses for your home equity line of credit (HELOC) and you may be able to save money by doing part or all of them yourself! By the way, consult your tax advisor to determine if those improvements apply for tax deductions.

1. Replace the front door

There’s an old saying in real estate that recommends that features get tours, but the front porch gets sales. People make decisions on home-buying all the time by starting with a gut reaction and finding reasons to support it later.

Why not start your home remodeling project with the first thing you interact with on your house: the front door. Upgrading an old, poorly-fitting front door with a newer energy-efficient model is a cheap, quick project that can instantly improve your home’s efficiency and aesthetic appeal. Best of all, hanging a door can be done in an afternoon!

With an average price of just over $1,200, including labor, an energy-efficient front door has an ROI of 98%! It’s also a chance to be creative. A new front door can add a splash of color and window placements can break up a monotonous front profile.

2. Minor kitchen remodels

Replacing major appliances and installing new flooring is a difficult, time-consuming, and expensive task. Being without a kitchen for weeks on end can be a nightmare and the number of professionals needed to install new lighting and other features is mind-boggling. The national average for spending here is $57,000, and the ROI for major kitchen remodeling isn’t great, at only 68%.

Minor kitchen upgrades, like new cabinets, counter-tops, and energy-efficient cook-tops, are comparatively inexpensive. The average spend here is just under $20,000 with an estimated return on investment at an impressive 80%. Just like with the front door, the changes are mostly aesthetic. People perceive a more modern-looking kitchen as being a better fit than a more “retro” look.

This is also a chance to customize a place where you spend a remarkable amount of time. Having a kitchen laid out just the way you like it can make it easier and more enjoyable to cook. This will encourage you to eat more meals in, and energy-efficient appliances can lower your electric bills for the life of the home.

3. Wooden decks

Outdoor space is one of the hallmarks of the current restatement of the American dream. Where else can a family sit and enjoy a frosty lemonade on a hot summer day? Watch the kids play in the yard while tending the grill on a beautiful wooden deck!

Wooden deck additions were unpopular for years, as consumers see them as luxuries. During a recession, remodeling dollars tend to focus on needs, like kitchen and bedroom updates. Now that the economy is improving, more people are looking at decks as valuable extensions for their living space.

The average cost, based upon a 16 foot by 20 foot wooden deck, is $10,000. The average return on investment is just over 80%. This is because of the perception of expanded living space at a reasonable price. Adding a deck costs about $35 per square foot, while a square foot of inside space costs an average of $85! Decks are a great way to increase the play space for a modest cost.

Bear in mind that just like the air conditioning in Alaska, a deck in a climate where the climate in inhospitable outdoors for much of the year will not have as much value as one in more temperate climates.

4. Convert an attic space into a bedroom

For most houses, the attic is an afterthought. It’s a place where unused craft projects and abandoned hobbies go to die. Consider turning that dead space into living space with a remodeling project!

Turning an existing attic space into a spare bedroom or office, complete with its own bathroom, can be done for a slightly steeper price. Nationally, the average cost is just over $50,000. That includes constructing a room, extending utilities to it and adjusting the exterior of the house to accommodate the new space.

This remodel provides a 77% return on investment in resale value, with the potential for more. If you have adult children or relatives visiting from out of town, an attic room can be a wonderful guest room. You could also rent it out for additional income!

Value Check®

The ValueCheck tool allows you to look up the value of any Colorado home. Are you looking to purchase a home? Enter the required information to compare the price of the home to the actual value of the home. Perhaps you would like to sell your home? Check the value of your home before you list it.